Capstick Muffler - Cash Budgeting
On February 25, 1990, Gerald Capstick, proprietor of Capstick Muffler, was planning the relocation of his muffler shop to the Northside Industrial Park, North Sydney, Nova Scotia. The relocation was scheduled for May 1st. In particular, Capstick was preparing monthly cash budgets for the first year of operation at the new location to determine operating line of credit requirements.
Company and Project Background
Capstick Muffler was an independent automotive exhaust business located in the rural community of Bras d'Or, which lies outside of the adjoining towns of North Sydney and Sydney Mines. The company gained a reputation for quality work since its beginning in 1979. Capstick supplied exhaust systems for domestic and foreign automobiles and for fishing boats. The company also supplied specialized mufflers and pipes to local garages that lacked specialized pipe-bending equipment.
This case was prepared by Professor Donald G Ross of St Francis Xavier University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. Some elements of this case have been disguised.
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Unfortunately, Capstick Muffler's potential had been restricted by its rural location and cramped operations. Capstick found it hard to attract customers to his muffler shop in Bras d'Or some eight kilometres from the population centre of the Northside. As well, the muffler operation only had two operating bays because it shared the facilities with Capstick's boat dealership. The lack of operating space had resulted in lost customers due to long queues for muffler repair work. To overcome these constraints, Capstick decided to set up new and expanded premises for his muffler business in the Northside Industrial Park.
Capstick's relocation to the Northside Industrial Park would place the company in the centre of the Northside market on the main road between Sydney Mines and North Sydney. The new, expanded premises were to consist of a three-bay steel building complete with a reception area/waiting room. The facility was designed to enhance sales by: (1) allowing faster service, (2) having a more central location, and (3) providing more attractive premises for customers waiting for their vehicles.
The Northside Muffler Market
As part of the relocation decision, Capstick conducted a market study of the size and nature of the Northside replacement muffler market. In particular, Capstick analyzed Department of Motor Vehicle registrations for the Northside, population statistics provided by the Northside Economic Development Assistance Corporation (NEDAC), and the results of a telephone survey of muffler purchasing practices of 200 randomly selected Northside residents.
NEDAC figures showed the population of the Northside to be about 25,600, with Sydney Mines accounting for 8,510, North Sydney 7,815, and the remainder in rural areas. These residents owned about 10,800 passenger and commercial vehicles which would normally require a replacement muffler every eighteen months. Hence, Capstick estimated an annual requirement of 7,200 muffler jobs worth about $612,000 to $720,000 per year.
Current Market Shares and Muffler Choice Factors
The Northside muffler market is served by Capstick Muffler (15.5%), Canadian Tire (20.0%), service stations (18.5%), Ideal Muffler (3.5%), the Sydney shops (including Midas, Speedy, and Thruway (32%), car dealerships (6%), and Do-it-Yourselfers (4.5%). When choosing their muffler repair shop, most Northside automobile owners (36%) rated service (good work done in a timely fashion) as being most important, while location (27.5%) and warranty (27%) were also seen as being very important. Price seemed a lesser consideration as only 9.5% of the surveyed muffler buyers cited price as the most important factor in the muffler purchase decision.
Competitive Advantages and Disadvantages
Comparison of the customer's preferred muffler shop with the customer's preferred product feature showed muffler shop choice to vary according to what the customer viewed as being most important in the muffler purchase decision. Capstick seemed to be serving more customers who stressed location and price, and fewer customers who stressed service and warranty. Likewise, Canadian Tire seemed to obtain more customers based on service, price, and location, and fewer customers who valued muffler warranties. Customers chose service stations on the basis of service and location, while service stations lost customers on the basis of price and warranty features. The Sydney shops attracted their Northside customers mostly on the basis of their muffler warranty but lost them because of location and, to a lesser degree, price and service. Finally, car dealerships got their Northside customers on warranty considerations but lost them on service and location grounds.
The New Facility and Capstick Muffler's Competitive Edge
Capstick Muffler's new facility and increased staff would provide faster service in a more attractive setting. The company's more central location on the main artery between Sydney Mines and North Sydney would enhance awareness levels and be more convenient for Northside customers. The company's product quality and warranties (lifetime on muffler) were already competitive but needed to be brought to the customer's attention by an aggressive advertising program.
Good product, good service, and good advertising are key components for success in the muffler business (Advertising Age, May 16, 1985). Capstick Muffler's advertising message would be directed at increasing customer awareness of personal and quality service and guaranteed good products. The company also intended to target female buyers because of the growing importance of this segment of the market.
The advertising message would be directed at the Northside market through newspaper advertising, local team sponsorship, household flyers, calendars, pens, & other novelty items. Following is a sample Capstick Muffler message: "Your neighbours at Capstick Muffler guarantee their mufflers for as long as you own your car. You get a firm estimate before work begins. Free inspection and free installation. Even free coffee. We offer a pleasant waiting room with a play area available for toddlers. Capstick's prices are fully competitive." The company would also use its location to maximum advertising advantage by using large back-lit signs, attractive premises, lawns, and entrances.
Target Market Share and Projected Cash Receipts
Capstick was targeting one-third (33%) of the Northside muffler market - about double its current share of 15.5%. To capture the additional market, the company would rely on increased customer awareness through increased advertising of product quality and superior location. The company would push its product warrantee to take about 9% more of the market from other Northside competitors (who held 42%). It would push its service, location, and good price features to take 9% more of the market from the Sydney shops (who held 32% of the Northside market).
Capstick's target of 33% of the Northside replacement muffler market (estimated at $666,000 in 1989) supported a projected base sales level of $219,780 plus an inflation increase for his first year of operations. (See Exhibit 1) There would be substantial variation in monthly sales revenues because of seasonality in muffler demand - the peak months are April, May (heavy), June (heavy), July, and August. (See Table 1)
Percentage of Yearly Sales by Month